UNTIL RECENTLY general insurers would not issue third party motor polices in respect of commercial vehicles. It just was not a profitable proposition. While the private sector players bluntly said no, their public sector counterparts did so mostly covertly. But lately one has been witnessing a paradigm shift in the said segment of the general insurance industry with the private as well as public sector players underwriting the said policies left, right and centre. On their part, the insured and the general public are happy with the welcome transformation. What has brought about this transformation? 

It all began with the detariffication of motor, fire and engineering insurance earlier this year. A complete detariffication of third party motor policy in respect of commercial vehicles (which would have resulted in a much higher premium) could not be achieved owing to strong resistance from the (commercial vehicle) fleet owners.  Knowing fully well that the latter can arm-twist it into submission (by refusing to ply commercial vehicles which can lead to disruption in the supply essential commodities, life-saving drugs, etc), the government as usual decided to meet them halfway. 

But the estimated claim ratio in this segment has been nearly 150% of the premium paid by the insured.  In other words, claims paid under the policy to the insured were much higher than the premium collected from the insured.  This warranted designing a new mechanism to manage third party claims arising from insuring commercial vehicles. Under the new mechanism, called the motor risk pool arrangement, premium has not been hiked to the levels the fleet owners feared.  The insurer is permitted to retain 10% of the premium collected as service charges and the balance is credited to the said pool account. When a claim is to be honoured, 60% of the amount to be settled is drawn from the pool account and the remaining 40% is shared by all the insurers outside the pool, the share of each insurer computed in line with its market share. 

If you are wondering why I am restating what is already known, it is only to drive home the point that a little bit of innovative restructuring can make all the difference between success and failure.  The new mechanism offers a built-in incentive to smaller players.  The smaller players are incentivised to underwrite more and more of these policies since their contribution to claim payout is lower on account of their lower market share.  At the same time, again thanks to their small size, the 10% of premium that they get to retain as service charges (vis-à-vis their contribution to claim payout) can contribute significantly to their bottom line.   

Such innovative restructuring can provide a new lease of life to several failed but useful products and services.  Another insurance product where such innovative restructuring is badly needed is the medi-claim policy.  Its relevance to a country like India where social security is conspicuous by its near-total absence hardly warrants emphasis.  Apart from hiking the insurance premium and raising the floor on the sum insured, insurers have placed a cap on doctor’s fee, room rent, reimbursement of expenses incurred towards anaesthesia, blood, oxygen, operation theatre, etc.  While I do not fault the insurers for making this product less affordable to the layman (after all, they may have valid reasons to support their actions) I do fault them for not attempting a similar innovative restructuring exercise.

Another example is our commodity futures market. Certain sections within the ruling party and the opposition wrongly alleged that futures trading was responsible for the rise in prices of essential items.  This led to the government banning futures trading in wheat and pulses.  The ban will be reviewed once the committee headed by Prof Abhijit Sen submits its report.   Meanwhile, Indian Institute of Management (IIM), Bangalore commissioned by the Forward Markets Commission (FMC) to study the impact of futures trading on prices of agricultural commodities and other aspects of futures market has already come out with an interim report.  According to the report, “the aberrations in commodity futures should be corrected but there should be no clamp-down on trading.”   Fortunately, the Abhijit Sen committee will take into account the findings of IIM, Bangalore.  Let us hope the ban will be lifted in the interest of the agricultural community.